The additional damage done by UUK’s CPI cap on USS’s most recent inflation projection

A 22% loss at retirement age becomes a 27% loss, and a 29% loss at age 86 becomes a 37% loss

Michael Otsuka
3 min readFeb 17, 2022

USS has just updated its 2020 valuation assumptions to 31 January 2022. As of that date, it is forecasting CPI inflation of 2.8% per annum over the long term. USS also assumes that, under UUK’s 2.5% inflation cap, such inflation would give rise, on average, to a 0.8% shortfall in the extent to which pensions are revalued to keep up with inflation each year. Here is a graph of the damage that this cap would do to the value of next year’s pension accrual for 40-year-old university workers earning £40k.

Figure 1: Consultation modeller modelling of 2.8% inflation assumption*

This graph shows that, under UCU’s proposals, an extra £640 in member contributions to retain current benefits for 2022–23 would spare these workers an immediate 12% cut in the value of their pension on account of UUK’s reduction in the accrual rate from 1/75th to 1/85th. The extra contributions also spare these members decades of further erosion in the value of their pension on account of the inflation cap, which is imposed after a two year delay (represented by the red diamonds) under UUK’s latest proposals. This erosion is represented by the downward slope of the orange line. On USS’s latest inflation assumptions, the initial 12% cut is expected to grow into a 27% cut in the first year these members draw pensions at retirement age 66, and into a 37% cut by age 86.

The rate of return on the extra £640 over the year (which amounts to a net reduction in take-home pay of £36 per month) to retain current benefits until April 2023 is an astonishingly good CPI+5.5% per annum.

The contrast between the current 2.8% inflation assumption and the 2.5% default inflation assumption of the consultation modeller is significant. The figure below shows the damage done by the inflation cap, under the assumptions of the consultation modeller.

Figure 2: Consultation modeller modelling of 2.5% default inflation assumption*

We see that a relatively small upward adjustment in the long term inflation assumption from 2.5% to 2.8% increases a 22% cut in pension income at retirement to a 27% cut, and a 29% cut in pension income at age 86 to a 37% cut.

*Technical note: The graphs apply the inflation assumptions, which were approved by UUK, of the USS consultation modeller. When one moves the CPI slider up from 2.5% to 2.8%, the modeller assumes that the presence of UUK’s CPI cap makes a negative 0.8% difference per annum in the revaluation of pensions. This gap is exactly the same as the 0.8% difference in CPI with and without UUK’s CPI cap which USS assumes to obtain as at 31 January 2022 (see “Technical Provisions — Assumptions” on p. 4).

Thanks, once again, to Jackie Grant for designing and updating the graphs.



Michael Otsuka

Professor of Philosophy, Rutgers. Previously on UCU national negotiating team for USS pensions.